Bank of England Governor Andrew Bailey suggested the central bank may not raise interest rates despite rising inflation linked to the Iran war. Speaking at a conference in Iceland, Bailey noted that the Monetary Policy Committee (MPC) could ignore higher energy prices if they don’t influence wage bargaining or household expectations. “Monetary policy generally looks through the direct effects of energy prices on inflation,” he said. “It takes time for interest rates to affect the economy, so higher rates might only push inflation below the two percent target after the energy shock passes, causing unwanted volatility.”
The remarks contrast with earlier signals from the MPC, which had hinted at rate hikes if the Middle East conflict persisted. However, Bailey emphasized that the UK’s weak domestic economy could limit the impact of energy price surges. “Continued weakness in the UK activity and labor market is likely to lessen the strength of second-round effects from higher energy prices,” he added. “These effects are stronger the larger and more persistent the energy price rise.”
Second-round effects occur when energy shocks lead to wage demands, creating a cycle of higher prices and wages. Bailey argued that the UK’s struggling labor market—marked by a five-year low in job vacancies and 5 percent unemployment—makes such a scenario unlikely. “The erosion of the labor market has already raised interest rates in the wider economy, even if the central rate remains unchanged,” he said.
Related: Fortegra acquired by DB Insurance
Before the Iran conflict, financial markets had anticipated three 0.25 percentage point rate cuts by 2026. By removing that possibility, the Bank of England has forced private lenders to adjust their offerings. “We have already tightened policy considerably relative to market expectations,” Bailey noted. “Key mortgage rates have increased since the conflict began.”
Analysts outside the central bank have noted that Bailey’s shift reflects broader uncertainty. “The MPC’s messaging change has created ripple effects in credit markets,” said one economist. “Lenders are recalibrating risk, which could slow economic activity further.”
Some industry observers argue the Bank of England’s stance may not fully address long-term inflation risks. “Removing rate cuts creates immediate pressure but doesn’t solve the underlying energy dependency,” noted a financial analyst. “The MPC will need to balance short-term stability with long-term structural issues.”
Related: Givers’ Regret: What Happens When Wealthy Parents Try to Claw Back Fortunes from Their Kids
Bailey’s remarks come amid broader debates over the central bank’s role in managing external shocks. “Monetary policy can’t control energy prices, but it can manage expectations,” he said. “The challenge is ensuring those expectations don’t spiral into self-fulfilling inflation.”
The UK’s economic outlook remains fragile, with weak labor market data and uncertain global conditions. Bailey’s cautious approach may reflect a recognition that aggressive rate hikes could harm an already vulnerable economy. “We’re handling a delicate tightrope,” he said. “Too much tightening risks slowing growth; too little, and inflation could become entrenched.”
The Strait of Hormuz closure, now in its fourth month, has kept energy prices raised. Yet Bailey stressed that the UK’s weak labor market weakens the link between energy costs and inflation. The US-Israeli conflict over Iran has kept energy prices raised. Yet Bailey stressed that the UK’s weak labor market weakens the link between energy costs and inflation. “Workers with limited job options are less likely to demand higher pay, breaking the wage-price spiral,” he said.
